•There was a slight improvement in current ratio between 2005 and 2007, from 0.58 to 0.63. It then dropped to 0.53 in 2008, but increased again over the following two years, ending 2010 at 0.59. This measures AT&T’s ability to pay its short-term liabilities with short-term assets. In general, a current ratio over 1 is desirable because when it falls below one, it could mean that the company is unable to pay off its short-term liabilities, due to a shortage of cash on hand.
•The quick ratio also experienced slight increases between 2005 and 2007. It started at 0.42 and ended 2007 at 0.46. It then decreased to 0.42 in 2008; peaked in 2009 at 0.52; and, dropped back down to 0.44 in 2010. Again, a common rule of thumb is that companies with a quick ratio over one are sufficiently able to to meet their short-term liabilities. This low quick ratio suggests that AT&T may be over-leveraged, struggling to maintain or grow sales, paying bills too quickly, or collecting receivables too slowly.
•There were slight decreases in working capital per share between 2005 and 2007, from -2.8 to -2.4. It then plummeted to -3.35 in 2009; and, lastly, ended 2010 at -2.37. This ratio indicates that the company is not likely to be able to cover its short-term debt. This declining working capital ratio could be a red flag that warrants further analysis. This ratio also gives investors an idea of the company’s underlying operational efficiency, possibly due to slow collection of receivables, for example.
•The cash flow per share saw a significant increase between 2005 and 2010. It started 2005 at 3.21 and ended 2010 at 6.51. This measures AT&T’s financial flexibility; it signals their ability to pay debt, pay dividends, buy back stock and facilitate the growth of business. As a general rule, a 10:1 ratio is good, so they are on their way to reaching that goal.
•AT&T experienced a steady increase in available cash flow per share from 2005 through 2010. 2006 was the low point for this ratio at 2.77; 2007 through 2009 was around 5.5; and, 2010 ended at 6.5. This measure signals a company’s ability to pay debt, pay dividends, buy back stock and facilitate the growth of business. This can also be used to predict future share prices, because when cash flow is on the rise, the odds are good that earnings and share value will soon be on the up, because a high cash flow per share means that earnings per share should potentially be high as well.
•There was a significant decline in inventory turnover for the three years of that data that is presented. In 2007, it was 82 times per year; dropped to 50 times in 2008; and, rose to 58 times in 2009. This relatively high ratio implies the possibility of strong sales for the company, but the Sales in the Income Statement show that this is not likely the case. Some alternative explanations are inadequate inventory levels or ineffective buying.
•The accounts receivable turnover experienced moderate increases from 2005 through 2007. Starting at 6 times per year in 2005, and ending 2007 at 7 times. The ratio then rose ever so slightly over the following three years, ending 2010 at 9 times per year. This improving ratio indicates the possibility that AT&T’s collection of accounts receivable is becoming more efficient. It also suggests that the company is likely making efficient use of their assets.
•Total asset turnover experienced minimal increases between 2005 and 2010. It ended 2005 at 0.35 and 2010 at 0.46. This ratio is used to measure the firm’s efficiency at using its assets in generating sales or revenue. This relatively low ratio could be attributed to AT&T’s pricing strategy because they have a higher profit margin, which is often associated with a low asset turnover.
•The average collection period experienced slight decreases from 2006 through 2010. The period was 73 days in 2006 and 41 days in 2010. This decrease in collection time is optimal, because it means that it isn’t take AT&T as long to turn its receivables into cash. And, ultimately, every business needs cash to pay off its expenses. The average collection period for credit extended is 30 days; therefore, AT&T is collecting receivables relatively close to the due date.
•There were increases in days’ sales in inventory for the three years that are shown. The data shows 0 days for 2005 and 2006; 4 days in 2007; and, a slight decrease from 7 days in 2008 to 6 days in 2009. This ratio estimates the number of days that it will take to sell the current inventory. Therefore, this low number, despite near constant sales, indicates good inventory control. Although this number could be understated because AT&T uses the natural business year for its accounting period, and the average daily cost of goods sold will be at a low point at this time of year.
•The operating cycle for AT&T experienced an overall decrease. It was 61 days in 2005; peaked at 73 days in 2006; dropped to 53 days in 2007, where it remained through 2008; and, ended 2009 at 52 days. This ratio represents the period of time that elapses between the acquisition of goods and the final cash realization resulting from sales and subsequent collections. But, due to the fact that AT&T uses the natural business year for accounting, the accounts receivable turnover and inventory turnover in days are likely understated, causing the liquidity to be overstated.
Summary- Liquidity In general, liquidity ratios were similar from December 2005 through December 2010. The exceptions included material decreases in inventory turnover, average collection period in days, and operating cycle. Overall, liquidity appears to be mediocre for AT&T.
Ratio Comparison with Selected Competitor Liquidity •In the receivables area, AT&T, Verizon, and Sprint Nextel are all relatively close. The receivables turnover for all three averages around 8 times per year, although AT&T’s turnover was faster in 2005 and 2006, when it was around 5 times per year. Also, Sprint’s receivables turnover was slightly higher in 2008 and 2009, at 9 times and 10 times, respectively.
The average collection period for the three companies stayed between 35 days and 45 days, for the most part. AT&T had slightly longer collection periods between 2007 and 2009, where it went from 49 days to 45 days; this ratio was materially higher in 2005 and 2006, at 61 days and 73 days, respectively. Sprint had the best collection period of the three, with the 2004 ratio being 34 days and the 2009 period averaging 35 days. Lastly, Verizon stayed between 41 days and 45 days between 2005 and 2010.
•As for inventory, the inventory turnover for AT&T is materially higher than Verizon and Sprint. While the latter two companies have a turnover ranging between 15 days and 25 days, and of the 3 year of turnover information provided for AT&T, the lowest turnover period was double the highest period of the other two companies. From 2007 to 2009, AT&T had inventory turnover of 82 days, 50 days, and 58 days, respectively.
The days’ sales in inventory for AT&T is also materially shorter than for the the other two companies. Sprint and Verizon had days’ sales in inventory ranging from 13 days to 23 days, while AT&T’s ranged between 4 and 7 days, meaning that AT&T would be able to sell off their inventory 2 to 6 times faster than the other two companies.
AT&T does have a somewhat different inventory method, which could account for some of the differences.
AT&T “...Our inventory includes new and reusable supplies and network equipment of our local telephone operations, which are stated principally at average original cost, except that specific costs are used in the case of large individual items. Inventories of our other subsidiaries are state at the lower of cost or market.”
Verizon “Inventory consists primarily of wireless and wireline equipment held for sale, which is carried at the lower of cost (determined principally on either an average cost or first-in, first-out basis) or market. We also include in inventory new and reusable supplies and network equipment of our local telephone operations, which are stated principally at average original cost, except that specific costs are used in case of large individual items.”
Sprint “Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. Costs of devices and related revenues generated from device sales are recognized at the time of sale.”
•The current ratio for Sprint is materially higher than the ratio for AT&T and Verizon. This is favorable for Sprint, because they are the only company of the three who have consistently kept their current ratio above 1, meaning that they have the ability to pay off their short-term debt using their current assets. The current ratios for AT&T ranged from 53% to 66%; and, Verizon’s fluctuated between 66% and 100%. Therefore, it would appear that AT&T is doing the worst of the three in this area.
•The quick ratio is, again, much higher for Sprint than for the other two companies. Sprint hit low points in 2006 and 2007, at 77% and 73%, respectively. The other 4 years were just over 1, indicating their ability to pay off short-term debts is still very good, even when excluding inventories. AT&T again has the lowest quick ratio, which average around 45%, and range between 41% and 51%. Verizon is in between the other two, with an average of 60%, although they hit a peak of 85% in 2008. This gives the appearance that Sprint is more liquid.
•Sprint has a materially higher working capital per share than the other two companies. The working capital ratio for Sprint stayed in the positive for all six years shown, with the exception of 2007, when it dropped to -0.2. This ratio started at 2.1 in 2004 and ended 2009 at 0.61. The other two companies ranged between -2.1 and -3.3, with the exception of Verizon in 2008, when it reached 0.1. This ratio suggests that AT&T and Verizon are more heavily leveraged and aren’t generating enough revenue to cover their expenses.
•Total asset turnover for all three companies was pretty similar. Sprint ranged from 0.41 and 0.58, with the exception of 2004 at 0.87. Verizon’s turnover stayed between 0.45 and 0.5; and, AT&T ranged between 0.3 and 0.46, with 2008 through 2010 staying at or near 0.46.
•Cash flow per share for AT&T and Verizon is materially higher than that of Sprint, with Verizon being the highest. The cash flow per share for Verizon stayed between 6.9 and 7.8; while, AT&T’s ranged from 5.5 to 6.5 between 2007 and 2010, with lower ratios in 2005 and 2006, at 3.21 and 2.77, respectively. Sprint, on the other hand, had a steadily decreasing cash flow per share ratio, ending 2004 at 2.5 and 2009 at 1.67, with a low point of -7.22 in 2007. This lower ratio on the part of Sprint in comparison with the higher ratios of the company in nearly all other aspects could be attributed to the fact that they have less debt, and are therefore likely using their free cash flow to pay that off, thus lowering this particular ratio.
Summary- Liquidity It would appear that Sprint is in the best liquidity position of the three, although they may want to review their inventory more closely. They had the best receivable time, as well as the best liquidity position in nearly all aspects, besides cash flow per share, which may possibly have a good explanation, as mentioned in the previous paragraph. AT&T and Sprint, on the other hand, may want to analyze their liquidity position, due to the fact that their best measures of liquidity indicate that they are unlikely to have the ability to cover their debts, which could ultimately mean trouble for the companies in the long run.
Ratio Comparison with the Industry Liquidity •The current ratio and quick ratio for AT&T are materially worse than the average industry ratios. As a general rule, the current ratio stays above 1, while the quick ratio remains as close to one as possible, but AT&T’s current and quick ratios are both between 0.41 and 0.66, putting them well under the industry average. This could be influenced by less liquid receivables and inventory.
•The working capital per share shows significantly less variation than the industry average. AT&T stayed between -2.4 and -3.3, while the industry fluctuated between 2.36 and -26 in a five-year span. This shows that although the liabilities for AT&T are ultimately higher than the assets, it is not as bad as the average company within the industry.
•The cash flow per share ratio is significantly lower than the industry average. The industry generally has $14 to $27 in free cash flow per outstanding share, while AT&T had only $2.76 to $6.50 per outstanding share. This could be due to the high leverage of the company, which would cause them to incur more interest charges per month, thus lowering their free cash available for use.
•AT&T’s inventory appears to be materially more liquid than the industry average, with an inventory turnover anywhere from 2 times more per year to 34 times more per year than the industry. The inventory turnover of 50 times per year to 82 times per year experienced by AT&T is also higher than that of it’s competitors. The days’ sales in inventory ratio is also much shorter than that of the industry.
The industry generally take 11 to 16 days to sell off inventory, while AT&T shows an ability to sell of in 4 to 7 days. This could be due to an inadequate amount of inventory or something similar, rather than simply being that much more efficient, especially when considering that other ratios indicate that AT&T is actually less efficient than the rest of the industry.
•The accounts receivable turnover for AT&T is within moderate range of the industry average. With the industry being between 6 and 8 for years 3 to 5; and, AT&T being between 7 and 8 from 2007 through 2010. The average collection period for AT&T is significantly better than that of the industry, which has a range of 50 days to 104 days, while AT&T ranges from 41 days to 73 days, with an average for the last 4 years around 45 days.
•The operating cycle for AT&T is within normal range of the industry average, with a normal cash conversion time of 62 days to 107 days, while AT&T usually completes their operating cycle in 51 days to 73 days, which is slightly above the average for the industry.
Summary- Liquidity Overall, the liquidity of the industry appears to be more sound than that of AT&T, with inventory being the only major exception. Within the competitive companies we reviewed, we found that AT&T had slightly different inventory accounting methods than its major competitors, so the same may be true for the industry as a whole, which may contribute to the difference. So, it would appear that the majority of the industry is more liquid than AT&T.
AT&T- Background Information AT&T Corp. (ATTC) formed several regional holding companies to hold their local telephone companies, one of which was AT&T, formerly SBC Communication Inc. They became an independent publicly traded telecommunications services provider in 1984, originally operating in only five states. They then merged with Pacific Telesis Group, Southern New England Telecommunications Corporation, and Ameritech Corporation between 1997 and 1999, which allowed them to expand to 13 states.
In 2005, they changed their name from SBC to “AT&T Inc.” They again expanded in 2006, following a merge with BellSouth Corporation, ultimately gaining another nine states. With this acquisition, they gained complete ownership of AT&T Mobility and YELLOWPAGES.COM (YPC).
They are now a leading provider of wireless communications, as well as local exchange services, long-distance services, data/broadband and Internet services, video service, telecommunications equipment, managed networking, wholesale services and directory advertising and publishing. They are currently operating in nearly half the world, with the 2010 total being 22 states.
Management’s Discussion and Analysis In January 2011, we announced a change in our method of recognizing actuarial gains and losses for pension and other postretirement benefits for all benefit plans. As part of this change, we have elected to immediately recognize the non-cash actuarial gains and losses in our operating results in the year in which the gains and losses occur.
We have applies this change retrospectively. As part of AT&T’s ongoing initiatives to manage its business from an external customer perspective, we no longer report intersegment revenue and report the cash operating and depreciation expense related to intersegment activity in the purchasing segment, which provided services to the external customer. This change was effective with the reporting of operating results for the quarter ended March 31, 2010. We have applied this change retrospectively. As of December 31, 2010, we served 95.5 million wireless customers.
Higher net customer additional in 2010 and 2009 were primarily attributable to higher net connected devices additions and additions in our reseller customer business. We are continuing to expand our deployment of U-verse High Speed Internet and TV services. As of December 31, 2010, we have passed 27.3 million living units (constructed housing units as well as platted housing lots) and are marketing the services to 77% of those units. Our competitors are multiple large national companies, such as Verizon Wireless, Sprint Nextel Corp., T-Mobile, Metro PCS and Cricket, and a larger number of regional providers of cellular, PCS and other wireless communications services.
In response to these competitive pressures, for several years we have utilized a bundling strategy that rewards customers who consolidate their service (e.g., local and long-distance telephone, high-speed Internet, wireless and video) with us. We continue to focus on bundling wireline and wireless services, including combined packages of minutes and video service through our U-verse service and our relationships with satellite television providers. We will continue to develop innovative products that capitalize on our expanding fiber network.
Future Operations We believe that future wireless growth will increasingly depend on our ability to offer innovative services that will encourage existing customers to upgrade their services, either by adding new types of services, such as data enhancements, or through increased use of existing services, such as through equipment upgrades.
We expect our operating environment in 2011 to remain challenging as weak economic conditions continue and competition remains strong. Despite these challenges, we expect our operating revenues in 2011 to grow, reflecting continuing growth in our wireless data and IP-related wireline data service including U-verse and business services. We expect continuing declines in traditional access lines and in print directory advertising.